Krugman vs. Luskin

In a recent column, Paul Krugman derided the President’s $726 billion proposed tax cut. The President claims that the tax cut is needed to create jobs. Krugman asserts that the costs of such job creation are too great:

Did you know President Bush's economic plan will create 1.4 million jobs? Oh, and did I mention that the plan will create 1.4 million jobs? And don't forget, the plan will create 1.4 million jobs.

Republican politicians are obviously under instructions to push that job number. On the Sunday talk shows some of them said "1.4 million jobs" so often that it sounded like an embarrassing nervous tic…

Still, let's pretend the Bush administration really thinks that its $726 billion tax-cut plan will create 1.4 million jobs. At what price would those jobs be created? …

The average American worker earns only about $40,000 per year; why does the administration, even on its own estimates, need to offer $500,000 in tax cuts for each job created?

If the purpose of the Bush tax cut is to create new jobs (and that seems to be their public position) and if Krugman is correct that each job created will cost $500,000 in revenue, then the Bush plan simply makes no sense.

Conservatives are often stung by Mr. Krugman’s criticism of the administration. Conservatives respond by challenging Mr. Krugman’s credibility so as to dampen his influence. It was not surprising, therefore that Donald Luskin, in National Review On-Line wrote that Krugman is lying about the effects of the President’s tax cut proposal on job growth.

At the core of Luskin’s claim is the idea that the President’s tax cut proposal will create only 1.4 million jobs. In particular, Luskin cites a February 4, 2003 Council of Economic Advisors report to the effect that the 1.4 million jobs will be created in the second half of 2003 and in 2004. Luskin then argues that over then ten-year period of the proposal, the tax cut would create 5.4 million jobs:

If the Bush tax cuts create 1.4 million jobs just through 2004, we can assume that they will create many more jobs over ten years. The CEA report doesn't give specific estimates beyond 2004, but they do say they believe that the impact of the tax cuts is front-loaded. So, let's guess that 500,000 new jobs are created each year for the next eight years. By the end of 2012, that's a cumulative 5.4 million new jobs.

Luskin’s article has at least superficial appeal in that while Krugman cites “Republican politicians” on “Sunday Talk Shows” for the 1.4 million jobs figure and (perhaps because he was writing in the paper edition of the New York Times) provides no link, Luskin’s NRO article both cites and links to the Council of Economic Advisor’s report.

Okay, so who is right? Will the President’s tax cut proposal create 1.4 million jobs or 5.4 million jobs over the ten-year period?

Many years ago, we were great fans of Arthur Conan Doyle’s Sherlock Holmes mysteries. Having been a Baker Street Irregular, we knew before we clicked through to read the report of the Council of Economic Advisors that it would not support Luskin’s claim of 5.4 million jobs created. We knew that for two reasons. First, Luskin only cites the CEA report for his contention that 1.4 million jobs would be created in 2003 and 2004. To get the remaining 4 million jobs of his claim of 5.4 million, he simply assumes that the tax cut proposal will create 500,000 jobs per year after 2004. If the CEA report supported that assumption, he would have cited it.

Secondly, and far more persuasive to a Sherlock Holmes fan, is the dog that didn’t bark. President Bush in currently traveling the country in an effort to build support for the tax cut plan. He and his surrogates say at every stop that the tax cut is meant to create jobs. If credible evidence that his tax cut proposal would create 5.4 million jobs existed, a Donald Luskin column in NRO would not have been the first time we had heard that figure. In the absence of hearing that dog bark, it is safe to assume that no credible evidence that the tax cut would create 5.4 million jobs exists.

Having failed to hear the bark, we clicked through to the CEA report to see exactly what it did and did not say.

We must first acknowledge that Luskin’s contention that the CEA report estimates that 1.4 million jobs will be created by the tax cut proposal in 2003 and 2004 is entirely correct. The report states:

Stronger GDP growth would lead to an estimated 510,000 new jobs expected to be created as a result of the proposal over the course of 2003. Another 891,000 new jobs would be created in 2004.

Be that as it may, Luskin’s assertion that “the CEA report doesn't give specific estimates beyond 2004” is, at best, disingenuous. It is true that the CEA report does not give specific numbers for job creation for each year of the tax cut after 2004. It is misleading to suggest that it does not provide useful information on the subject. For instance, the CEA report says the following:

On average over end-2002 to end-2007, job creation as a result of the package would be 140,000 higher than otherwise.

Now, our math may be a bit rusty but if the tax cut proposal will result in average job growth of 140,000 for the first five years of the proposal (2003-2007), it is safe to say that the total number of jobs created during that period is 140,000 x 5 or 700,000.

One does not have to be Sherlock Holmes to deduce that if the President’s proposal results in a total of 1.4 million new jobs in 2003 and 2004 but only 700,000 new jobs in 2003-2007, the tax cut must results in job creation losses of 700,000 in 2005 through 2007.

In order to arrive at his estimate of 5.4 million jobs created over the ten-year life of the tax cut, Luskin assumed that 1.5 million jobs would be created in the three-year period of 2005-2007. The CEA report that he relies on suggests that instead of creating 1.5 million jobs during that period, the effect will be a job creation loss of 700,000.

Thus, based on the CEA report, the effects of the tax cut proposal will be to increase job growth for the first year and a half of the ten-year period and then decrease the creation of jobs after that initial burst.

The administration often talks about the 1.4 million jobs to be created in the first two years of the tax cut. It rarely talks about the effects of the tax cut on job creation for any period after 2004.

We find it highly ironic that Luskin would call Krugman a liar for failing to consider the job creation effects of the tax cut after 2004 when Luskin first links to the CEA report and then ignores its findings on that very subject.

Is The Social Security Trust Fund a Fraud?

There has been much debate over the Social Security Trust Fund. Many people have described the very existence of the fund as a sham, a fraud or a Ponzi scheme. We think the Social Security Trust Fund will be a sham only if our leaders choose to make it one. In order to explain why we think that, a little bit of history is in order.

The Social Security system is funded on a pay as you go basis. Social Security taxes collected from today’s workers are spent on today’s retirees. By the early1980s it had become apparent that the system would face a demographic crisis when the baby boomers began to retire. The ratio of workers (paying Social Security taxes) to retirees (receiving benefits) would deteriorate leaving a gap between projected receipts and projected outlays.

President Reagan, the Republican led Senate and the Democratic House decided to do something about that future crisis. They raised Social Security taxes well beyond what was necessary to fund benefits of the then current retirees.

The amount of Social Security taxes collected above what is necessary to fund current benefits is known as the Social Security surplus. The idea of the 1983 tax increase was to build up those surpluses until the baby boomers began to retire. Once the retirement of the baby boomers left the Social Security system in deficit, the accumulated surpluses could be called upon to pay benefits.

In one respect, the plan worked. The Social Security system has indeed taken in far more in taxes than it has paid out in benefits each year since 1983. For instance, in 2002, the Social Security system took in about $159 billion more in taxes than it paid out in benefits. Those surpluses are expected to run until around about 2015 when the retirement of the baby boomers results in a Social Security deficit.

What happens to the surplus? The Social Security system uses the surplus to purchase Treasury bonds. It is the purchase of Treasury Bonds (general obligations of the United States government) that leads to the charges of fraud, sham and Ponzi scheme.

The Social Security Trust fund pays cash to the United States Treasury and receives back an IOU from the Treasury. That IOU promises to repay the cash plus interest at a later time.

What does the Treasury do with the money it receives in exchange for its promise of repayment? That depends on the status of the federal budget. When the federal government runs a budget deficit in its general operation (non-Social Security) budget, the money the Treasury receives from selling bonds to the Trust Fund is used, in whole or in part, to finance the general operations of government.

During the Reagan and Bush I years, even after the entire Social Security surplus was used to fund general government operations and the government still ran a budget deficit.

That changed in the latter part of the Clinton years. The federal budget deficit for its general operations was less than the Social Security surplus. In that case, the funds received by the Treasury from the sale of bonds to the Trust Fund that were not needed to fund general operations of government were used to pay down the national debt.

When President Clinton talked about “saving Social Security First,” what he meant was balancing the general operations budget of the government so that the entire amount received by the Treasury from selling bonds to the Trust Fund would be used to pay down the national debt.

When candidate Gore talked about a Social Security “lockbox,” what he meant was keeping the federal budget for general operations in balance so that the entire Social Security surplus could be used by the Treasury to retire portions of the national debt.

When politicians speak of “raiding the Social Security Trust Fund,” what they mean is running a budget deficit for general operations of the government so that some (or all) of the money received by the Treasury from the sale of bonds to the Trust Fund is used to fund the general operations of government.

The Clinton plan to “save Social Security,” in a nutshell, was to balance the budget for the general operations of the government and use the entire Social Security surplus to pay down the national debt. When the baby boomers began to retire and the Social Security system went into deficit, the Treasury, being relatively debt free as a result of paying off large portions of the national debt, would be able to borrow the funds necessary to repay its obligations to the Trust Fund. The Trust Fund, having the IOUs from the Treasury repaid, with interest, could then tap the surplus generated over three decades to pay benefits to baby boomer retirees.

Both parties implicitly signed on to the Clinton plan. Republicans and Democrats alike pledged to not “raid” the Social Security Trust Fund. George W. Bush promised that we could have spending increases and a huge tax cut and still have money left over to pay off the entire publicly held national debt.

Those promises evaporated amid economic slowdown, tax cuts, a falling stock market, national emergency and war. Currently, the administration plans to spend every dollar (and more) received by the Treasury from its sale of bonds to the Trust Fund on the general operations of government not only this year but in each and every year until at least 2012.

That fact is at the heart of the claims that the Trust Fund itself is a fraud. The only assets held by the Trust Fund are Treasury bonds. A Treasury bond is simply a promise by the United States Government to repay the debt, with interest, at a later time. Since both Treasury Bonds and Social Security benefits are obligations of the Federal Government, the Trust Fund is said to hold no real assets. If one accepts that the Treasury bonds held by the Trust Fund are not real assets, then the charge of fraud is correct.

We do not accept that characterization. Ross Perot reputedly holds several hundred million dollars of U. S. Treasury bonds. Is he holding worthless assets?

The Treasury bonds are backed by the full faith and credit of the United States Government. Our currency has exactly the same backing. When the Trust Fund paid for the Treasury bonds it paid in the currency of the United States. That currency derives value only from the full faith and credit of the United States. The Trust fund took back a security backed by the full faith and credit of the United States. If the bonds held by the Trust Fund are worthless because they are backed only by the full faith and credit of the U.S. then the money used to pay for those bonds was also worthless.

The Trust Fund surplus has to be invested in something in order to earn interest. Ask any financial advisor for the safest investment vehicle available and the response will be either Treasury bonds or FDIC insured bank accounts. Both are ultimately backed by the full faith and credit of the Government. How can an investment be the safest available and be worthless at the same time? We certainly wish someone would give us several million dollars of "worthless" Treasury bonds.

Let us assume that the Social Security trust fund was invested in something “real” as opposed to Treasury bonds. Would the Social Security trust fund be any safer if it held German bonds or Brazilian bonds as opposed to U.S. bonds?

We do not think so. The Trust Fund would be substituting the risk that Germany or Brazil would not repay their debts for the risk that the United States government will not repay its debts. Is a default more likely by Brazil or the United States?

Suppose the Trust Fund was invested in corporate bonds. Who is more likely to default on its debt, the United States government or WorldCom?

The problem with the Social Security trust fund comes not from its choice of investment vehicles but rather from a political choice to degrade the full faith and credit of the United States by running massive deficits in the general operation budget.

The Social Security Trust Fund is a fraud only if our leaders choose policies that are fiscally irresponsible. President Bush is proposing another huge tax cut with no plan for getting the general operation budget into balance until long after he has left office even if he wins a second term. He proposes budgets that spend all of the money brought in by non-Social Security tax receipts, all of the Social Security surplus and still run large deficits.

The Social Security Trust Fund is a fraud only if our leaders degrade the full faith and credit of the United States. Unfortunately, the current administration seems bent on doing exactly that.

Get The Lead Out

Kevin Drum points us this L.A. Times story about lead poisoning and IQ. According to the Times, about 32 million older homes have lead paint. Children are often exposed to the harmful effects of lead as a result of that paint.

The Times references a new study published in the New England Journal of Medicine. The Abstract of the New England Journal of Medicine article is here. For any of you with subscriptions to the NEJOM, the full article is here. The study found that:

Blood lead concentrations, even those below 10 µg per deciliter, are inversely associated with children's IQ scores at three and five years of age, and associated declines in IQ are greater at these concentrations than at higher concentrations. These findings suggest that more U.S. children may be adversely affected by environmental lead than previously estimated.

According to the study, even low level exposure to lead causes children to lose about 7.4 IQ points. One in ten, or about 6 million children, are suffering the adverse effects of lead poisoning on their intelligence. It would cost about $1000 per house or about $32 billion to eliminate the lead paint and protect the children.

Should the government spend the money? We think that both in terms of policy and politics, the answer is an unequivocal “yes.”

First of all, as Kevin points out, “it's hard to overstate the importance of this. A difference of 7.4 IQ points is a lot, especially when you start getting to the lower end of the IQ scale (say, an IQ of 83 compared to an IQ of 90)…”

A policy of removing the lead would satisfy the first requirement of public policy and politics. It would improve the lives of a lot of people by a significant amount.

Secondly, although $32 billion is a lot of money, the costs occur only once while the benefits would flow not only to current children but also to future generations.

As economic policy, the spending of the money makes far greater sense than a tax cut for wealthy Americans. If one assumes that the economy needs stimulus, spending the money on contractors and painters to remove and improve houses is a far more efficient method of stimulating the economy than tax cuts for people who will save instead of spend a large portion of the cut.

The money required to remove the lead paint is an investment. It improves the quality of the nation’s stock of housing. More importantly, it improves the stock of human capital by increasing the IQ of 10% of our children by a significant amount both for the current generation of children and for future generations.

As fiscal policy, it makes sense to spend the money even in times of budget deficits. The Time story notes that elimination of the lead paint, though costing $32 billion, would save $60 billion in special education and other costs. A near 100% return on the investment is a good deal.

As education policy, removal of lead makes good sense. Adding 7.4 points of IQ to 10% of the students will result in increased learning for each dollar spent on education as the children who would otherwise suffer the effects of lead poisoning are better able to learn. Lead poisoning also causes behavioral problems. The elimination of those behavioral problems will permit more time for learning and result in a better educational environment for all kids.

As social policy, the benefits of removal of lead will be reaped mostly by children and families at the lower end of the socio-economic spectrum, as those kids are far more likely to live in older, un-renovated housing.

As environmental policy, the removal of an environmental toxin is an obvious good.

As a matter of politics, a Democratic candidate should be pleased to argue that improving the living conditions and intelligence of children while cleaning up the environment is more important than providing a larger tax cut for the rich.

The prevention of lead poisoning of our children is the exact type of issue that Democrats should support and it is the type of issue they need if they intend to mount a serious challenge to George Bush in 2004.

Removal of lead paint will save our children from environmental poisoning that is causing brain damage. Science supports the policy. It is good economics, good environmental policy, good education policy, good social policy and the right thing to do.